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2003-04 Budget

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Fiscal developments in the States

The States' fiscal positions vary considerably. Nevertheless, these differences are expected to narrow over the forward estimates, with almost all States forecasting small positive cash and fiscal balances as a per cent of gross state product by 2005-06.

Many States have greatly reduced their non-financial public sector net debt as a per cent of gross state product over the past decade. This trend is primarily attributed to States implementing medium term fiscal strategies and asset sales.

State general government sector fiscal balance

The aggregate state fiscal balance for the general government sector in 2003-04 is projected to be -0.1 per cent of GDP, lower than in 2002-03. Over the forecast period, the aggregate state fiscal balance is expected to rise marginally and be in surplus by 2005-06.

A fiscal balance measures in accrual terms the gap between government savings plus net capital transfers, and investment in non-financial assets. A fiscal balance deficit indicates that a government is borrowing.

Both New South Wales and Tasmania expect fiscal balance surpluses in 2003-04 and over the forward estimates. The aggregate deficit figure in 2003-04 reflects anticipated deficits in each of the other States.

The fiscal balance positions in individual States vary considerably (Chart 4). However, there is a convergence over the forward estimates period with the majority of States expecting small positive fiscal balances as a per cent of gross state product by 2005-06. The largest deficit reduction is forecast to occur in the Northern Territory.

The Northern Territory's general government fiscal balance deficit as a per cent of gross state product increased significantly in 2001-02. This reflected that capital outlays for the Alice Springs to Darwin railway and Darwin's new East Arm Port were 'at their peak' in 2001-02.1 However, the Northern Territory estimates its general government fiscal balance will continue to improve over the forward estimates period and become a fiscal balance surplus by 2005-06.

Chart 4: Individual State general government sector fiscal balance

Chart 4:  Individual State general government sector fiscal balance

 Chart 4:  Individual State general government sector fiscal balance

Sources: ABS Cat. No. 5512.0, state 2002-03 mid-year reports, Victoria, Western Australia and the Australian Capital Territory 2003-04 Budgets and Treasury estimates.

Trends in the aggregate fiscal balance for state/local general government, public non-financial corporations and the non-financial public sector are presented in Tables 1, 2 and 3, Statement 12, Budget Paper No. 1.

State general government sector cash surplus

In aggregate terms, the cash surplus in the general government sector is projected to decrease to 0.2 per cent of GDP in 2003-04, lower than in 2002-03. In the forward estimate years, the aggregate state general government sector surplus is expected to climb, reaching 0.4 per cent of GDP by 2005-06.

An underlying cash surplus reflects the extent to which cash is available to a government to either increase its financial assets or decrease its liabilities (assuming no revaluations and other changes occur). An underlying cash deficit measures the extent to which a government requires cash, either by running down its financial assets or by borrowing.

Cash surpluses in New South Wales, Queensland, South Australia, Tasmania and the Australian Capital Territory underpinned the aggregate state general government sector cash surplus forecast for 2003-04. Despite considerable variation in the States' cash positions in recent years, almost all States forecast cash surpluses by 2005-06 (Chart 5).

Chart 5: Individual State general government sector cash surplus

Chart 5:  Individual State general government sector cash surplus

 Chart 5:  Individual State general government sector cash surplus

Sources: ABS Cat. No. 5512.0, state 2002-03 mid-year reports, Victoria, Western Australia and the Australian Capital Territory 2003-04 Budgets and Treasury estimates.

Trends in the aggregate cash surplus for state/local general government, public non-financial corporations and the non-financial public sector are illustrated in Chart 3, Statement 12, Budget Paper No. 1.

State net debt

In aggregate, state general government sector net debt is expected to remain negative at 0.6 per cent of GDP in 2003-04, a small increase on 2002-03. In the public non-financial corporations sector, net debt is expected to be 4.6 per cent of GDP in 2002-03,2 up on the 2001-02 estimate of 4.4 per cent of GDP.

Net debt is defined as the sum of selected financial liabilities minus the sum of selected financial assets. The higher the net debt of a government, the greater the call it will impose on future revenue flows to service that debt.

Many States have greatly reduced their levels of general government net debt over the past decade (Chart 6). For example, between 1995-96 and 2003-04 the South Australian general government sector reduced its net debt by over 13 per cent of gross state product. This primarily reflects South Australia's electricity privatisation process.3 Similarly, Victoria and Tasmania reduced their general government net debt by more than 9 per cent of gross state product over the same period by means of budget surpluses and proceeds from asset sales.

The stock of net debt has also declined in most States' public non-financial corporations sector over the previous decade (Chart 6). The public non-financial corporations sector nearly exclusively owns the stock of state non-financial public sector net debt. Some States continue to record negative net debt, that is, they are in a net financial asset position. For example, the Australian Capital Territory non-financial public sector is expected to have negative net debt from 2000-01 to 2002-03. The Queensland non-financial public sector is expected to return to negative net debt by 2004-05 (Chart 6).

Trends in aggregate net debt for state/local general government, public non-financial corporations and the non-financial public sector are illustrated in Chart 6, Statement 12, Budget Paper No. 1.

Chart 6: Individual State net debt by sector (as at end of financial year)

General government

 

Chart 6: Individual State net debt by sector (as at end of financial year) - General government

 

 Chart 6: Individual State net debt by sector (as at end of financial year) - General government

Public non-financial corporations

 

Chart 6: Individual State net debt by sector (as at end of financial year) - Public non-financial corporations

 

 Chart 6: Individual State net debt by sector (as at end of financial year) - Public non-financial corporations

Non-financial public sector

 

Chart 6: Individual State net debt by sector (as at end of financial year) - Non-financial public sector

 

 Chart 6: Individual State net debt by sector (as at end of financial year) - Non-financial public sector

Sources: ABS Cat. No. 5512.0, state 2002-03 mid-year reports, Victoria, Western Australia and the Australian Capital Territory 2003-04 Budgets and Treasury estimates.

Loan Council arrangements

The Australian Loan Council is a Commonwealth-State Ministerial Council that coordinates public sector borrowing. The Loan Council comprises the Commonwealth Treasurer as Chairman, and the State and Territory Treasurers.

Present Loan Council arrangements operate on a voluntary basis and emphasise transparency of public sector financing rather than adherence to strict borrowing limits. These arrangements are designed to enhance financial market scrutiny of public sector borrowing and facilitate informed judgments about each government's financial performance.

The Loan Council traditionally meets annually in March to consider jurisdictions' Loan Council Allocation nominations for the forthcoming year. As part of the agreed arrangements, the Loan Council considers these nominations, having regard to each jurisdiction's fiscal position and the macroeconomic implications of the aggregate figure. The Loan Council Allocation is a headline measure of a government's call on financial markets.

Outcome of March 2003 Loan Council meeting

The Loan Council met on 28 March 2003 to consider Loan Council Allocation nominations for 2003-04. In aggregate, they represent a surplus of $3,876 million (Table 17). The Loan Council approved each State's nominated Allocation.

The Loan Council agreed four proposals to further increase the transparency of the Uniform Presentation Framework. These proposals focus on disaggregating particular items within the Uniform Presentation Framework Operating Statement and adopting guidance on the publication of 'underlying' budget results in the Uniform Presentation Framework. These changes are to be included in Commonwealth, State and Territory Uniform Presentation Framework tables from 2002-03 Outcomes (Actuals) reports. The Commonwealth Government's Loan Council Allocation Budget update for 2003-04 is included in Statement 9, Budget Paper No.1.

Table 17: Loan Council Allocation nominations for 2003-04(a)

Table 17:  Loan Council Allocation nominations for 2003-04(a)

  1. Loan Council Allocation (LCA) nominations for 2003-04 reflect current best estimates of non-financial public sector deficits/surpluses. Nominations have been provided on the basis of policies announced up to and included in jurisdictions' mid-year reports. Nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of their mid-year reports, and projected bottom lines for each jurisdiction's public non-financial corporations sector, where actual estimates are unavailable.
  2. The sum of the surpluses of the general government and the public non-financial corporations sectors may not directly equal the non-financial public sector surplus due to intersectoral transfers.
  3. This comprises net lending by governments with the aim of achieving government policy, as well as net equity sales and net lending to other sectors or jurisdictions. Such transactions involve the transfer or exchange of a financial asset and are not included within the cash deficit/surplus. However, the cash flow from investments in financial assets for policy purposes has implications for governments' call on financial markets.
  4. Memorandum items are used to adjust the non-financial public sector deficit/surplus to include in LCAs certain transactions - such as operating leases - that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the non-financial public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs - for example, the funding of more than employers' emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes.

Note: Governments' contingent exposures under infrastructure projects with private sector involvement are identified in the Loan Council report, rather than included as components of LCAs. These exposures, which are measured as the governments' contractual liabilities in the event of termination of projects, are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. Government outlays under these projects, such as equity contributions and ongoing commercial payments to the private sector, continue to be included in the annual total public sector deficit, and hence the LCA.


1 Northern Territory Budget 2002-03, Paper No.2, Fiscal and Economic Outlook, p. 25.

2 Estimates for the public non-financial corporations sector and the non-financial public sector are unavailable after 2002-03 in most States. The public non-financial corporations sector comprises bodies that provide goods and services (such as electricity, gas and water) that are mainly market, non-regulatory and non-financial in nature and are financed predominantly through sales to the consumers of these goods and services.

3 South Australia Budget Paper 3, Budget Statement 2002-03, p. 6.3.

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